One-Hit Wonders: A Study of Contract-Year Performance among Impending Free Agents in Major League Baseball

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INTRODUCTION

In 2004, Adrian Beltre, then a twenty-five-year-old third baseman for the Los Angeles Dodgers, entered the final year of his first major-league contract. That year, Beltre posted the best statistics of his career. He finished the year with career highs in hits, home runs, runs batted in (RBI), batting average, on-base percentage (OBP), and slugging percentage (SLG). (1) He parlayed this performance into a major contract with the Seattle Mariners through free agency, increasing his salary by over loo percent. Unfortunately for the Mariners, Beltre did not come close to producing at the level he did during his contract year. For example, in 2004 Beltre hit 48 home runs and had a batting average of .334; after signing his new contract with Seattle, his season high in home runs was 26 and his season high batting average was .276. (2) Beltre seemed to have a resurgence with the Boston Red Sox in 2010, but nevertheless, in baseball circles, cases like Adrian Belire's evoke the idea of the contract-year phenomenon.

As described by author Malcolm Gladwell, the contract-year phenomenon is a theory that asserts that players--regardless of their sport--will statistically perform better in the final year of their contract than they have in previous years, in an effort to receive larger contracts on the free-agent market. (3) The phenomenon is so ingrained in modern baseball culture that ESPN.com produced an entire article for fantasy baseball enthusiasts, profiling players in contract years who should perform well based entirely on this theory. (4)

In the high stakes world of Major League Baseball (MLB), where contracts have reached remarkable figures, management needs a way to properly evaluate and compensate a free-agent player. If this contract-year phenomenon exists, and general managers act on short-term performance, they will not likely get what they pay for. The literature on baseball player performance has approached the issue from several different perspectives.

PLAYER MEASUREMENT AND COMPENSATION

A great difficulty exists in determining a player's monetary value in professional baseball. Statistics provide quantitative data to use in comparison to other contemporary and historical players. However, management must then decide which statistics are important and deserve more value than others. Is a home run more valuable than a stolen base? If management places value on certain statistics when evaluating a player, they are providing incentives for that player to behave opportunistically.

Holbrook and Shultz examined the salary model in MLB. They wanted an answer to the question "How much is a home run worth?" The authors designed a formula to determine the effects a player's statistical performance had on future enhancement or diminishment of contract value. (5) Their study effectively assigned a dollar amount to every hit, home run, fielding error, etc. Although the contract-year phenomenon was not the focus of their study, they did find that in a player's contract year, home runs became more valuable while hits became less valuable. Reaching the stage of potential free agency did cause changes in the value of statistics relative to the ultimate payoff the player received based on that performance. This study demonstrated that pay and performance are highly correlated, especially in a player's free-agent year. Therefore, players realize the incentive of parlaying a great statistical season into a large payday through free agency.

Lackritz, in his study of salary evaluation for MLB players, concluded that the only proper way to compensate a player was on a yearly commission basis. He argued that a player's value should be determined based on individual and team performance and pay could vary greatly from year to year. (6) This would reduce the financial risk for teams and deter opportunistic behavior on the part of the athletes. Every year would be a "contract year. …